oThe emergence of new variants of the coronavirus has prompted governments across Europe to implement further rounds of lockdowns and tighten travel restrictions, which continue to weigh on air travel passenger demand and confidence.
oAs such, we expect the rebound of European air traffic to be weaker than we previously foresaw, particularly in this year's critical summer months, fueling further cash burn and debt accumulation for British Airways PLC (BA).
oAssuming widespread immunization across Europe and the U.S. by the end of third-quarter 2021, we expect BA's operating cash flow to turn positive in 2022 and credit metrics to recover to a level consistent with the ratings.
oWe are affirming our 'BB' long-term issuer credit rating on BA, following the same rating action on its parent International Consolidated Airlines Group S.A. (IAG). At the same time, our stand-alone credit profile assessment for BA is unchanged at 'bb-'.
oWe are also affirming our issue ratings on BA's enhanced equipment trust certificates (EETCs; see Ratings List below).
oThe negative outlook mirrors that on IAG given the airline's integral relationship with the group.
LONDON (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
Pandemic-related lockdowns, travel restrictions, and virus variants continue to weigh on BA's prospects.
Governments across Europe have introduced a new round of lockdowns and tighter travel restrictions to contain the spread of new coronavirus variants, which continue to weigh on airline passenger demand and confidence. Although the rollout of several vaccines inspires hope that social and economic activity will begin to normalize, the outlook for air travel remains uncertain.
We have recently revised downward our forecasts on European air passenger traffic
We now believe that European air passenger traffic and revenue in 2021 will be 30%-50% of 2019 levels (underperforming our global average of 40%-60%). We maintain our expectations for 2022 that traffic will reach 70%-80% of 2019 levels, with recovery to 2019 levels by 2024. This estimate incorporates our assumptions that vaccine production will ramp up, rollouts will gather pace, and widespread immunization across Europe will be achieved by the end of third-quarter 2021. Furthermore, we anticipate a slow recovery of business and corporate traffic. We now anticipate a likely delay in a more meaningful recovery to after the crucial summer season and an acceleration in traffic more toward year-end. We estimate that BA's air passenger traffic this year will be about 30%-35% of 2019 levels; it could recover to 65%-70% in 2022. However, our forecast is subject to significant uncertainties and, most importantly, hinges on the vaccination progress, widespread immunization, and new variant risk.
BA's traffic recovery depends on governments easing travel restrictions.
Under normal operating conditions, BA deploys about 80% of its capacity on long-haul international flights. The transatlantic network, which we normally view as a strength to BA's competitive position and profitability, has been restricted since March 2020, when the U.S. closed its borders to foreign travelers from Europe, including the U.K. While we recognize significant pent-up demand for air travel, BA's cash flow restoration is pending recovery in passenger traffic and new bookings, which are in turn contingent on governments easing border, travel, and quarantine restrictions. It is currently uncertain when these restrictions will ease, particularly for BA's routes between North America and the U.K., and its short-haul intra-Europe routes between the U.K. and major European countries such as France, Germany, Italy, and Spain. However, we recognize that vaccination rollouts in the U.S. and the U.K. have quickly gathered pace, which could pave the way for easing restrictions on transatlantic travel between the two countries.
We expect 2021 to be another very difficult year for BA.
BA continues to adjust capacity and cut operating costs, having furloughed staff through the U.K. government employee support scheme, which has been further extended to September 2021. Management is also implementing an operational restructuring program that reduced almost a quarter of its workforce by the end of 2020. Additionally, the airline has deferred £450 million of pension contributions from 2020-2021 to 2023. It should further benefit from a lower fuel bill, which we forecast to be about £1.1 billion in 2021 (about one-third of the £3.2 billion fuel bill in 2019). We forecast that EBITDA could turn positive, albeit at a low level, in 2021, from negative £2.4 billion in 2020.
We anticipate BA's adjusted debt to almost double in 2021 compared with 2019.
BA's extensive cash burn throughout the pandemic, including hefty fuel hedge losses and restructuring costs, is likely to accumulate in adjusted debt of about £7 billion in 2021 (almost double the adjusted debt of £3.7 billion at the end of 2019). Consequently, we do not expect BA's debt leverage profile to be restored to pre-pandemic levels over the next few years, absent significant credit-supportive measures. That said, BA has the flexibility to adjust capital expenditure (capex) if passenger demand does not recover as expected, and this could help moderate debt accumulation.
We expect credit metrics to recover significantly in 2022.
In our view, widespread immunization looks to be achievable by most developed economies by the end of third-quarter 2021. We believe this will help to lessen or lift travel restrictions and restore passenger confidence in flying. We forecast adjusted EBITDA could recover to £1.5 billion-£1.8 billion in 2022 (50%-60% of the £3 billion generated in 2019) and reach £2.0 billion-£2.2 billion in 2023 (65%-70%). We forecast that adjusted funds from operations (FFO) to debt will rebound to 12%-20% in 2022 and could exceed 20% in 2023. However, low visibility regarding the pandemic and recessionary trends--and their impact on passenger volumes--adds significant uncertainty to our forecasts.
In our view, BA's parent, IAG, will provide liquidity support if necessary.
BA is the largest airline owned by IAG. We consider that IAG will retain the financial capacity and provide liquidity support to BA if necessary. IAG started 2020 with more financial leeway and a larger liquidity buffer than that of many peers and has maintained strong liquidity so far. We estimate that IAG had total pro forma liquidity of EUR9.1 billion at the start of 2021, as adjusted by S&P Global Ratings. This includes BA's new £2.0 billion term loan facilities substantially guaranteed by UK Export Finance (UKEF), and excludes revolving credit facilities that are due within 12 months. BA has obtained over £3 billion of external financing since the pandemic began. This includes £300 million from the U.K. government's COVID Corporate Financing Facility (CCFF); $1 billion of EETCs (about £720 million equivalent, which replaced the $750 million, £540 million equivalent, previously raised secured bridge loan); and £2.0 billion term loan facilities substantially guaranteed by UKEF.
Our outlook on BA is aligned with that on IAG due to the airline's integral relationship with the group.
The negative outlook reflects our view that the group's financial metrics will remain under considerable pressure in the next few quarters and that there is high uncertainty regarding the pandemic and its effects on air traffic demand, as well as IAG's financial position and liquidity.
We would lower the rating if passenger demand recovery is further delayed or appears to be structurally weaker than expected, placing additional pressure on IAG's credit metrics; and if we expect that adjusted FFO to debt won't recover to at least 12% by 2022. This could occur if the pandemic cannot be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remain reluctant to book flights.
Although we currently don't see liquidity as a near-term risk, we would lower the rating if air traffic does not recover in line with our expectations, external funding becomes unavailable for IAG, and management's proactive efforts to adjust operating costs and capex are insufficient to preserve at least adequate liquidity, such that sources exceed uses by more than 1.2x in the coming 12 months.
We could also lower the rating if industry fundamentals weaken significantly for a prolonged period, impairing IAG's competitive position and profitability.
To revise the outlook to stable, we would need to be more certain that demand is normalizing and the recovery is robust enough to enable IAG to partly restore its financial strength, such that adjusted FFO to debt increases sustainably to at least 12%, alongside a stable liquidity position. Prudent capital spending and shareholder returns are also necessary for a return to a stable outlook.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
oLegal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
oCriteria | Corporates | Industrials: Criteria For Rating Aircraft-Backed Debt And Enhanced Equipment Trust Certificates, Sept. 12, 2002
oCriteria | Structured Finance | General: Structured Finance Criteria Introduced For Cayman Islands Special-Purpose Entities, July 18, 2002
Related Research
oEurope's 2021 Air Passenger Traffic Likely To Stall At 30%-50% Of 2019 Level, Feb. 18, 2021
S&P Global Ratings is the world's leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide.
S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spglobal.com/ratings.
.
S&P GLOBAL, INC. 
